Columbia FDI Profiles Country profiles of inward and outward foreign direct investment issued by the Vale Columbia Center on Sustainable International Investment October 18, 2012 Editor-in-Chief: Karl P. Sauvant Editor: Padma Mallampally Managing Editor: Mimi Wu

Inward FDI in Hungary and its policy context by Magdolna Sass and Kalman Kalotay *

In the 1990s, Hungary used to be a front-runner among Central and Eastern European countries in terms of attracting foreign direct investment (FDI). At that time, it attracted FDI both through the privatization of state-owned enterprises to foreign multinational enterprises (MNEs), and through Greenfield investment by foreign MNEs in export-oriented manufacturing (especially automotive and electronics). Almost two decades later, the economy is still a major host of FDI, with inflows of US$ 4.7 billion in 2011, although it has lost its privileged status within the region. Its policy approach to inward FDI (IFDI), too, has undergone changes over the past two decades: from being a country that was the first in Central and Eastern Europe to open its economy fully to FDI and offer incentives for it, it has moved to being one with more selective policies. The Government still successfully encourages FDI in export-oriented production (particularly automotive); however, in utilities, banking and retail, it has recently imposed windfall taxes, which mostly affect foreign players, indicating a less favorable stance toward them. This change in policy is in partly a result of the recent global financial and economic crisis, which has hit the country hard.

Trends and developments

Country-level developments

Hungary was practically the first country in Central and Eastern Europe (CEE) to open up to foreign investors at the beginning of the region’s transition to a market economy, and it was also the first to involve foreign investors to a great extent in the privatization process. Thus, it took

*Magdolna Sass ( [email protected] ) is Senior Research Fellow at the Institute of Economics, Research Centre for Economic and Regional Studies of the Hungarian Academy of Sciences, Budapest, Hungary. Kalman Kalotay ([email protected] ) is Economic Affairs Officer at the United Nations Conference on Trade and Development, Geneva, Switzerland. The authors wish to thank Gabor Hunya and Mikhail Szany for their helpful comments on this Profile . The views expressed by the authors of this Profile do not necessarily reflect those of Columbia University, the authors’ respective institutions or their partners and supporters. Columbia FDI Profiles (ISSN: 2159-2268) is a peer-reviewed series. 2 the lead among CEE economies in the first decade of transition in terms of per capita IFDI stock and IFDI stock as a percentage of the gross domestic product (GDP), as reflected by data for 2000 (annex table 1). In 2000, Hungary’s IFDI stock was also higher in absolute terms than that of any other CEE country except Poland, which is much larger in terms of population and GDP. However, in the second decade after the start of the transition process, Hungary lost its leading position. In 2011, Hungary’s stock of IFDI was lower than that of Poland and the Czech Republic, and its per capita IFDI lower than that of the Czech Republic and Slovakia. 1 In terms of IFDI stock relative to GDP, Bulgaria and Estonia surpass Hungary. However, in international comparison, the Hungarian economy can still be considered one in which IFDI plays a major role.

The relative decline of Hungary’s attractiveness for IFDI can be traced in its inflows, which became relatively lower, compared to those of the other CEE countries, starting from around 2004–2005 (annex table 2). A directly comparable economy in terms of size of population, the Czech Republic had a higher inflow in almost every year between 2000 and 2011. On the other hand, new competitor countries in a catching-up phase for IFDI appeared on the scene: from around 2000, Slovakia, and then Bulgaria and Romania had relatively high inflows from just before their joining the European Union in 2007. In addition, FDI flows to Hungary were hit hard especially during the crisis years of 2009 and 2010, both in absolute terms and relative to flows to other countries in the CEE region. The ratio of IFDI flows to gross domestic capital formation also declined noticeably in 2009–2010 (annex table 2a). Data for 2011 indicate an increase in FDI inflows, however, as a press release of the Hungarian National Bank 2 states; this is mainly due to a large capital in transit 3 flow in the fourth quarter of 2011. According to the same source, capital in transit accounted for around 83% of total inflows in 2011, which indicates that “real” FDI inflows have not recovered yet.

Until 1998, privatization played an important, and in certain years even dominant, role in the FDI inflows.4 In comparison, between 2000 and 2011, only two years (2003 and 2005) witnessed large privatization projects involving FDI. In 2005, the largest privatization deal in the modern history of Hungary took place when 75% of the shares of Budapest Airport were sold to the British BAA International Ltd.5In2003, Postabank was sold to the Austrian Erste Bank.6 Smaller transactions took place in other years, though they did not have a major impact on the level of annual FDI inflows.

1 Per capita IFDI has been calculated on the basis of data from UNCTAD’s FDI/TNC database (for IFDI) and World Bank data on population of countries. 2 See http://english.mnb.hu/Root/Dokumentumtar/ENMNB/Statisztika/mnben_statkozlemeny/mnben_fizetesi_merleg/CA 11Q4_EN.pdf. 3 “Capital in transit means that Hungarian companies receive capital or a loan from one member of a group of companies, which they transfer to another foreign member of the group at very short notice.” See,ibid , p. 4. “Capital in transit means transactionswithin a multinational enterprise group that pass through the compiling economy without making any impact.” Ibid., p.8. 4KalmanKalotayand HunyaGábor, “Privatization and foreign direct investment in Central and Eastern Europe,” Transnational Corporations, vol. 9, No.1 (April 2000), pp. 39–66. 5 See http://news.bbc.co.uk/2/hi/business/4540316.stm. 6 See http://www.erstegroup.com/content/0901481b/8000aaf5.pdf. 3

Over the period 2000-2010, the composition of inward FDI in Hungary changed considerably. The share of equity capital diminished, even turning negative in certain years (2003, 2009). At the same time, reflecting the competitiveness and profitability of the foreign affiliates already operating in Hungary, reinvested earnings dominated during most of the decade, the main exceptions being the crisis years between 2008 and 2010. Other capital (mainly intra-firm lending) was strong in 2001, 2006 and 2009, while in 2010 (again presumably because of the impact of the crisis) it was strongly negative.7

There has been a significant change in the sectoral composition of IFDI during the two decades of significant FDI flows to Hungary. At the beginning of the 1990s, manufacturing attracted the bulk of FDI. The sector remained relatively important for IFDI in 2000 (annex table 3), accounting for 47% of total FDI stock. Its significance however gradually decreased. In 2009, the share of this sector declined to below one-quarter of total stock, although it rose again somewhat (to 30%) in 2010. Within manufacturing, some branches are dominated by foreign affiliates, for example the production of transport equipment and electrical equipment. On the other hand, FDI in services gradually gained importance, which is explained in the 1990s by the sequence of privatizations, and in the years after 2000, by the rising shares of “wholesale, retail trade and repair” (partly the building of big supermarkets) and “real estate, computer and business services” (partly the offshoring and offshore outsourcing of certain business services to Hungary). 8

Overall, FDI is more present in Hungary’s tradable industries (even in services, 9 such as tradable business services or computer services) than in the tradable sectors of its competitor economies in the region. 10 Nevertheless, Hungary is also a host to large FDI projects in non-tradable service industries such as banking, retail and telecommunications, where foreign affiliates dominate the industry.

As in other new member states of the European Union, 11 investors from other EU member economies (especially Germany, the Netherlands, Austria, Luxemburg, France) dominate FDI in Hungary, together with those from other developed countries from outside Europe (especially the United States and, to a lesser extent, the Republic of Korea and Japan) (annex table 4).12 The emergence of Central America as a source may be related to substantial outward FDI from

7 See the balance-of-payments statistics of the Hungarian National Bank at http://www.mnb.hu/Statisztika/statisztikai-adatok-informaciok/adatok-idosorok/vii- kulkereskedelem/mnbhu_fizm_20090330. 8MagdolnaSass and Martina Fifekova, “Offshoring and outsourcing business services to Central and Eastern Europe: Some empirical and conceptual considerations,” European Planning Studies, vol. 19, No.9(2011), pp. 1593–1609. 9 Jane Hardy, Magdolna Sass and Martina Fifekova, “Impacts of horizontal and vertical foreign investment in business services: The experience of Hungary, Slovakia and the Czech Republic”, European Urban and Regional Studies, vol. 18, No. 4(2011), pp. 427–443. 10 Yuko Kinoshita, “Sectoral composition of foreign direct investments and external vulnerability in Eastern Europe”, IMF Working Paper WP/11/123, May 2011. 11 KalmanKalotay, “Patterns of inward FDI in economies in transition”, Eastern Journal of European Studies,vol. 1, No. 2 (2010), pp. 55–76. 12 Registered countries of origin of FDI do not always represent the country of the parent company of a MNE because, in many cases, affiliates realize the actual investments due to tax, strategic, geographical, or cultural reasons. This is the case with respect to some important investments in Hungary (e.g., Siemens invested through its Austrian affiliate, GM and IBM through their German affiliates). This may be the reason for the high share of FDI from Central America as well. 4

Hungary in previous years and may serve tax optimization purposes; for example, some important Mexican investors (Cemex, Nemak) are present in Hungary, but data on FDI by source do not indicate investments that originate in Mexico (annex table 4).

Foreign affiliates play a determining role in the Hungarian economy. As noted, in comparison with other new member states of the European Union, the FDI stock as a percentage of GDP is among the highest in Hungary (annex table 1). Foreign affiliates are responsible for more than 80% of business R&D, for almost 80% of exports and for almost half of total gross value added. They own more than half of capital owned by companies, carry out more than half of investments and employ more than 20% of the workforce. 13 Practically all the top exporters of the country are foreign affiliates (see the next section on The Corporate Players).

One of the most important channels for a positive impact of IFDI on the host economy is backward linkage, i.e., the contacts of foreign affiliates with local suppliers. These linkages remained below expectations in Hungary, though anecdotal evidence points to their increase since the first MNEs started their operations in Hungary. The reasons for the limited linkages can be found both on the supply and demand sides. On the demand side, many affiliates do not have the independence to decide about their suppliers. In some cases, they do not require large enough quantities from local companies so that local firms are not interested in investing further amounts for becoming suppliers. On the supply side, many Hungarian companies are not able to supply the required spare parts and components in the required quantity and/or quality, not able to meet other requirements (e.g., terms and timeliness of delivery) or are not able to meet the requirement of continuous productivity improvements. However, there are some Hungarian affiliates of foreign MNEs with a high level of local sourcing. For example, Knorr-Bremse acquires an estimated 30–40% of its inputs from Hungarian and locally owned companies. 14 In the case of Electrolux, for certain products the share of local, mainly Hungarian-owned suppliers, is around 80%. 15 At the other extreme, Audi has a very low number of local, and especially Hungarian- owned suppliers. Altogether, Audi buys locally only 4.5% of the parts and components used in the production of its cars. 16

While market-seeking investments dominated in the first half of the 1990s, efficiency-seeking FDI gradually became more and more important. The latter were helped until the country’s EU accession in 2004 by the special regulation on industrial customs-free zones, 17 in which companies assembled imported inputs into exportable outputs, using mainly local workers. Large projects in the electronics and car industries and in the white goods industry are motivated mainly by the availability of skilled but relatively cheap labor. After 2003, efficiency-seeking investments grew rapidly in certain service industries as well, for example in business and

13 ZoltánPitti, “A gazdaságiteljesítményekvállalkozásimérett őlfügg őjellemz őiMagyarországon” (“The characteristics of economic performance in relation to the size of the companies in Hungary”), Köz-Gazdaság, vol.VI, No.3 (October 2011), pp. 91–116. 14 Magdolna Sass, “The use of local supplies by MNC affiliates: what are the determining factors?” ICEG EC, Opinion No. 10, September 2008, available at: www.icegec-memo.hu/hun/_docs/KESZ_20060131/opinion_mnc_affiliates.pdf . 15 AndrásBakács, VeronikaCzakó and Magdolna Sass, “Beszállítókéshálózatosodás: az Electrolux-LehelKft. példája” (“Suppliers and networking: the case of Lehel-Electrolux”), Külgazdaság, vol . L, No. 7–8 (2006), pp. 44–59. 16 Sass, (2008), op. cit. 17 This regulation was abolished in 2004. See more details in Magdolna Sass, “FDI in Hungary: the first mover’s advantage and disadvantage,” European Investment Bank Papers , vol . 9, No. 2(2003), pp. 62–-90. 5 computer services. In certain industries, especially in pharmaceuticals, accumulated knowledge in Hungary is also a factor of attraction.

The corporate players

The largest foreign affiliates in Hungary can be classified into two distinct groups. In the first one concern the Hungarian affiliates of foreign MNEs, among which the largest ones by total sales are the local affiliates of Audi, Nokia, GE, Samsung, Philips, E.ON, Deutsche Telekom (M-Telekom), and Fibria Cellulose (annex table 5). In the second category, there are the formerly Hungarian-owned companies that were privatized through the stock exchange and are now in majority foreign ownership, such as MOL (one of the top ten by sales), OTP Bank and Richter. The specific feature of these latter companies is that they are under dispersed foreign ownership but not under foreign control; thus the local, Hungarian management takes all strategic decisions. These three companies, which are also very active outward foreign investors, are therefore not foreign affiliates in a strict sense. 18 The listing of the top ten is largely similar in terms of foreign affiliates’ own capital or assets (annex table 5a). This ranking favors capital- intensive firms such as MOL, Audi and M-Telekom. A third ranking of the top foreign affiliates, by exports, which reflects the efficiency motive driving much FDI in Hungary, is headed by MOL and Audi (annex table 5b).

As noted in the preceding section, some industries within Hungary’s manufacturing and services sectors are dominated by foreign affiliates. For example, in the production of transport equipment, Hungary is host to production sites of Suzuki (Japan) and Audi (Germany); a new factory of Daimler AG (Germany) started its production in 2012. Some other companies such as General Motors’ (United States) German affiliate Opel have important spare parts operations in Hungary. Important first-tier automotive suppliers also produce in Hungary, such as the German Knorr-Bremse and Robert Bosch. In electronics, the world’s various leading branded and contract manufacturers are present in the country, including National Instruments, Jabil and GE (all United States), Flextronics (Singapore), Foxconn (Taiwan Province of China), Philips (the Netherlands), Samsung (Republic of Korea), Siemens (Germany), and Nokia (Finland). In services, examples include: in banking, MKB, majority owned by the German BayerischeLandesbank and CIB Bank owned by the Italian IntesaSanpaoloSpA; in retail, the French Auchan, the Belgian-owned Cora, the British Tesco, and the German Lidl; and in telecommunications, M-Telekom (owned by Deutsche Telekom) and the local affiliate of the Norwegian firm Telenor.

Annex table 6 lists the largest M&A deals by foreign MNEs in Hungary during the period 2009- November 2011, including the top five each year in terms of estimated/announced transaction values. The majority are in services, but the two largest deals are the acquisition of a 20% share in the oil and gas company MOL Nyrt by Russia’s Surgutneftgaz in 2009 – a share that the Russian company subsequently agreed to resell to the Hungarian Government, as described in the section below – and the acquisition of a majority share in the chemicals manufacturer

18 See Magdolna Sass and KálmánKalotay, “Hungary: Outward FDI and its policy context, 2010”, in: Karl P. Sauvant, Thomas Jost, Ken Davies, and Ana-Maria Poveda-Garcés, eds., Inward and Outward FDI Country Profiles (New York: Vale Columbia Center on Sustainable International Investment, January 2011), available at: http://www.vcc.columbia.edu/books, pp. 115–129. 6

BorsodChemZrt by China’s YantaiWanhua Synthesize Group in 2011. Among the top Greenfield FDI projects in Hungary during 2009-November 2011 (annex table 7), the largest is a US$1.2 billion investment by Volkswagen (Audi) in 2010.

Effects of the recent global crisis

The 2008-2009 global crisis hit FDI inflows to Hungary hard. This can be attributed not only to the supply side of FDI, but also the demand side: the Hungarian economy experienced the biggest slowdown in the CEE region. Domestic economic problems aggravated the impact of the global crisis. Because of a high and unsustainable budget deficit and rocketing state debt arising well before the crisis, a restrictive fiscal policy was implemented that deepened the decline of GDP.

During the crisis years, especially in 2009 and 2010, a strong decline characterized FDI inflows. While in previous years (except for 2003) annual inflows always exceeded US$ 3 billion, in 2009 and 2010 they fluctuated around US$ 2 billion. In 2009, both equity capital and reinvested earnings turned negative, while in 2010, the “other capital” component of IFDI went into the red. As it was already noted, the recovery indicated by 2011 data is only virtual because of the large share of transit capital in that year’s inflow. 19

The crisis also opened opportunities for MNEs from emerging markets to enter or expand in Hungary. Examples of MNEs from China include Huawei, which expanded its already existing affiliate in 2011; ZTE, which entered Hungary in 2010 in order to supply Telenor (Norway) from a closer location; and Wanhua, which acquired the chemical firm Borsodchem in 2011.20 Even more prominently, Russian MNEs attempted to buy large assets in Hungary, building on traditional trade links between the countries. As noted, in the energy industry where the links are particularly intense, Surgutneftegaz bought 21% of MOL from OMV Austria in 2009 (annex table 6). However, both the Hungarian Government and the target company blocked this takeover and, in the end, Surgutneftegaz agreed in 2011 to resell its stake to the Hungarian Government. 21 In another case, the Russian state-owned Sberbank agreed in 2011 to buy the foreign affiliates of Volksbank International (Austria) in eight transition economies, including Hungary.22 The latter company intended to reduce its losses incurred in those countries, and in Hungary in particular, where a windfall tax on banking (see the following section on the policy scene) has plunged most foreign-owned banks into the red.23

The crisis had a dual effect on individual FDI projects. It accentuated the scaling down of some of the projects negatively affected by the combined effects of global competition and the global

19 See footnotes 2 and 3. 20 http://www.ft.com/cms/s/0/1aadca66-2e2e-11e0-8733-00144feabdc0.html. 21 KalmanKalotay and Andrei Panibratov, “Developing competitive advantages of Russian multinationals through foreign acquisitions.” Paper presented at the International Conference on Re-Assessing Emerging Market Multinationals’ Evolving Competitive Advantage, Judge Business School, University of Cambridge, United Kingdom, March 25–27, 2011. 22 http://www.bbj.hu/finance/sberbank-completes-volksbank-acquisition_62654. 23 http://www.ft.com/cms/s/0/77fe45c8-9387-11e1-8c6f-00144feab49a.html#axzz21FNvp5Zm. 7 crisis. 24 As a result, FDI inflows remained low. At the same time, some large projects were announced recently, especially in the automotive industry, although they could not fully compensate for the decline experienced elsewhere. One of the biggest Greenfield investments, amounting to the US$ 1.2 billion, was that begun by the German Daimler AG in 2009 in Kecskemét.25 The Hungarian affiliate produces Mercedes Benz cars in Hungary, starting from March 2012. Another significant project was the extension of production capacity by Audi, which is already present with an affiliate in Gy őr. This extension was initiated in July 2011 and its value was US$ 1.2 billion as well.26 In the same year, General Motors/Opel announced a significant capacity extension in its affiliate in Szentgotthárd, which will result in a US$ 672.6 million inflow (annex table7). These large projects are spread over more than one year, and thus expected to influence FDI inflows in the coming years.

The policy scene

Hungary is a small open economy that, at the beginning of its transition to a market economy, embarked on a deep process of liberalization that to a large degree is irreversible. Although the Government’s attitude has shifted in recent years toward more state intervention, Hungary is a founding member of the World Trade Organization, and therefore bound by its rules on trade and subsidies. In addition, it has been a full member of the European Union since 2004, benefiting from its customs union and, since 2007, also from the free movement of persons due to its entry into the Schengen zone. Hungary is bound by EU rules on state aid, which creates an even playing field with other new EU member economies in terms of FDI incentives, which are bound by exactly the same rules. Hungary has also signed the Lisbon Treaty (which entered into force in 2009), which envisages a gradual transfer of FDI policy responsibilities from member states to the European Union. The most visible effect of that change concerns bilateral investment treaties (BITs): the Commission is now entitled to negotiate BITs in the name of all 27 member countries, and the treaties of the latter have to be revised for their compatibility with the Lisbon Treaty. However, it seems that member countries are not yet fully prohibited to negotiate new treaties, and can keep the old ones once they have passed a compatibility test. This is an important consideration for Hungary, which had 56 ratified BITs at the end of 2011. 27

Hungary has traditionally had an open investment regime, with national treatment, most-favored- nation treatment and fair and equitable treatment offered to most investors. In addition, EU investors have to be treated like local investors without exception. This situation however may change in the future, as some of the most recent policy measures adopted by the Government --

24 On long-term trends in relocation, see GáborHunya and Magdolna Sass, “Coming and going: gains and losses from relocations affecting Hungary”,wiiw Research Reports, No.323, The Vienna Institute for of International Economic Studies, Vienna, November 2005. On trends during the crisis, see Sergey Filippov and KalmanKalotay, “Global crisis and activities of multinational enterprises in new EU member states,” International Journal of Emerging Markets, vol.6 (4) (2011), pp. 304–328. 25 See http://media.daimler.com/dcmedia/0-921-656507-1-1246693-1-0-0-0-0-0-11701-614232-0-1-0-0-0-0-0.html. 26 See http://www.reuters.com/article/2011/07/07/audi-idUSLDE7660OH20110707. 27 The BITs cover 57 countries (the same treaty applies to both Belgium and Luxembourg), of which 22 are EU members, four are other developed countries (the United States is nevertheless missing from this list), 11 are economies in transition and 20 are developing countries. Source: UNCTAD’s Investment instruments On-line database, available at: http://unctad.org/en/Pages/DIAE/International%20Investment%20Agreements%20(IIA)/Investment-instruments- On-line-database.aspx. 8 especially the windfall (“crisis”) taxes on selected industries (banking, energy, retail, telecommunications) -- could be interpreted as problematic for the fair and equitable treatment of foreign investors as the latter are overrepresented in the group of firms affected by new taxes. 28

Since a new conservative team gained a two-thirds majority in the Hungarian Parliament in May 2010, the Government has sent mixed messages to the international investment community. On the one hand, it continued supporting export-oriented projects, especially in the automotive industry, electronics production and shared service centers that build on the country's undoubted cost advantages and skills. Projects in those areas have continued to benefit from government subsidies within the limits that the EU has imposed on state aid. At the same time, the Government has explicitly and implicitly taken a hostile stance toward FDI in certain service industries, especially in banking, energy, retail trade, telecommunications, and water supply.29 The first four of these five industries have been stricken by high windfall taxes, constructed such a way as to maximize their impact on foreign players.

An additional sign of a less enthusiastic welcome to foreigners in retail became evident when the Government introduced a voucher system offering tax benefits to employers and employees purchasing mostly food items. These vouchers have been offered for acceptance by locally owned hypermarkets, but not by any of the large foreign-owned chains. As for water supply, the Government has made it clear that it sees it as a regulated industry in the future,30 largely incompatible with the profit motives of foreign investors. The current ruling party already demonstrated its hostility to FDI in water supply in September 2009, when nationally it was still in opposition but in control of the municipality of Pécs: the local city council de facto expropriated the assets of Suez (France), which had a water contract in Pécs. 31 In a country that traditionally had an investor-friendly environment in the 1990s and 2000s, this was the first “nationalization” of a foreign investor in more than two decades.

The Government is also delivering mixed messages to foreign firms in its institutional framework for investment promotion. On January 1, 2011, the Hungarian Investment and Trade Agency (HITA) replaced ITD Hungary Zrt., which used to operate as the Government’s investment and trade development agency between 1993 and 2010, overseeing most of the country’s successes as a front-runner in investment promotion. Investors have had to adjust to a new, less experienced team, which took over only some of the ITD employees, and on an ad-hoc basis. That could well disrupt various services based on long-term stability, such as aftercare.

HITA took over investment promotion at a difficult period of Hungary's external economic relations. Since 2010, the country has adopted a new Constitution and various key laws that

28 The EU has initiated investigations on the compatibility of these taxes with Hungary’s membership. See “European Commission investigates controversial Hungary tax”, Eurotribune , January 3, 2011 (http://www.eurotribune.eu/index.default.php/?p=17158&l=0&idioma=2), and “Brussels says Hungary’s “crisis tax” on telecoms is illegal”, Eurotribune , Seotember 29, 2011 (http://www.eurotribune.eu/index.default.php/?p=20656). 29 http://www.budapesttimes.hu/2011/01/10/tax-bitten-multinationals-howling-in-brussels/. 30 See, for example, “PM Orbán unveils National Protection Plan,” Budapest Business Journal, September 12, 2011, available at: www.bbj.hu/economy/pm-orban-unveils-national-protection-plan_60167 . 31 “Suez to go to Vienna court over lost Hungary contract,” Budapest Business Journal, January 27, 2011, available at: www.bbj.hu/business/suez-to-go-to-vienna-court-over-lost-hungary-contract_55699 .

9 provoked a debate both in Hungary and abroad about their compatibility with the rule of the law and democracy. Critics of Hungarian legislation have insisted that many of the legal instruments adopted in a revolutionary zeal were incompatible with Hungary's international democratic commitments.

This Profile does not take a position in the international debate on the changes mentioned above, as the purely political angle of the problematique is outside its scope. It notes only that Hungary's image has been affected negatively, and in the area of country image, perceptions often equal reality.

Conclusions

Hungary is still a very competitive location for many MNEs, as evidenced by the high level of inward FDI stock and the recent expansion of some of the foreign affiliates located there. However, it faces an emerging image problem, which at the end could slow down many otherwise highly profitable projects. For that reason, it needs to regain its positive image if it wishes to remain a magnet for FDI within its own region. That recovery of the lost positive image will by default be a long and painful process. This is so because reputation can be lost quickly, but to recover it takes time. In the Hungarian case, the Government and HITA have to convince investors that legal stability and rule of the law have now been irrevocably re- established. That re-establishment can be proven only by prompt actions, including a quick phasing out of the windfall taxes, a prompt treatment of investor-state disputes (that will inevitably follow from the current situation) and in the general policy framework of the country, guarantees of the Hungarian Government to international partners as regards the respect for international legal norms.

Once guarantees are provided to investors and foreign partners, HITA can try to embark on a sinuous road of new image building for Hungary, and once image building is successful, it can envisage investment attraction activities. In the meantime, it needs to strengthen its investor services (especially aftercare services) and policy advocacy (the latter is naturally weak in a newly established institution).

These are daunting tasks that will probably get results only in the long term. In the meantime, Hungary's investment potential, which is still very strong, risks being unfulfilled, especially in comparison with other new EU member economies that have not faced similar political problems since 2010.

Additional readings

Antalóczy, Katalin, Magdolna Sass and Miklós Szanyi, “Policies for attracting foreign direct investment and enhancing its spillovers to indigenous firms: The case of Hungary,” in E. Rugraff and Michael W.Hansen, eds., Multinational Corporations and Local Firms in Emerging Economies (Amsterdam: Amsterdam University Press, 2011), pp. 181–209. 10

Bélyácz, Iván and Mónika Kuti,“The role of external debt in the international investment position in Hungary,” Working Paper 03/2011, School on Local Development, University of Trento, Italy, available at: www.unitn.it/en/sld/11701/working-papers .

Czakó, Erzsebet, “Characterizing the patterns of inward and emerging outward FDI in Hungary,” in Louis Brennan, ed., The Emergence of Southern Multinationals: Their Impact on Europe (Basingstoke: Palgrave Macmillan, 2011), pp. 92–113.

Koltay, Jen ő, “Multinational companies and labour relations in Hungary: Between home country–host country effects and global tendencies,” Discussion Papers of the Institute of Economics, Hungarian Academy of Sciences, MT-DP 2010/15, available at: http://econ.core.hu/file/download/mtdp/MTDP1015.pdf, pp. 1–22.

Useful websites

For FDI incentives, Hungary: http://www.hita.hu/Content.aspx?ContentID=1ffac861-6d88-4135- b5ee-7c5f3c9e8b5d

For FDI statistics: Hungarian National Bank, Hungary, available at: http://english.mnb.hu/Statisztika/data-and- information/mnben_statisztikai_idosorok/mnben_elv_external_trade/mnben_kozetlen_tokebef

For the Hungarian Investment and Trade Agency, Hungary: http://www.hita.hu/

* * * * * Copyright © Columbia University in the City of New York. The material in this Profile may be reprinted if accompanied by the following acknowledgment: Magdolna Sass and Kalman Kalotay, “Inward FDI in Hungary and its policy context” Columbia FDI Profiles (ISSN: 2159-2268), October 18, 2012. Reprinted with permission from the Vale Columbia Center on Sustainable International Investment ( www.vcc.columbia.edu ).

A copy should kindly be sent to the Vale Columbia Center at [email protected] .

For further information please contact: Vale Columbia Center on Sustainable International Investment, Mimi Wu at [email protected] .

The Vale Columbia Center on Sustainable International Investment (VCC –www.vcc.columbia.edu), led by Lisa Sachs, is a joint center of Columbia Law School and The Earth Institute at Columbia University. It seeks to be a leader on issues related to foreign direct investment (FDI) in the global economy. VCC focuses on the analysis and teaching of the implications of FDI for public policy and international investment law. 11

Statistical annex

Annex table 1. Hungary: inward FDI stock, 2000 and 2011

(US$ billion and percentage of gross domestic product (GDP))

2000 2011 2000 2011 Economy US$ billion Percentage of GDP Hungary 23 84 48 60 Memorandum: other new EU member countries from Central and Eastern Europe Poland 34 198 20 38 Czech Republic 22 125 38 58 Romania 7 70 19 38 Slovakia 5 51 23 53 Bulgaria 3 48 21 89 Estonia 3 17 47 75 Slovenia 3 15 15 31 Lithuania 2 14 20 33 Latvia 2 12 27 43

Source : UNCTAD, FDI/TNC database, available at: http://unctadstat.unctad.org.

Note : Data exclude FDI in special purpose entities. Comparator countries are listed by the order of their inward FDI stock in 2011.

Annex table 2. Hungary: inward FDI flows, 2001–2011

(US$ billion)

Economy 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Hungary 3.9 3.0 2.1 4.3 7.7 6.8 4.0 6.3 2.0 2.3 4.7 Memorandum: other new EU member countries from Central and Eastern Europe Poland 5.7 4.1 4.6 12.9 10.3 19.6 23.6 14.9 12.9 8.9 15.1 Czech Republic 5.6 8.5 2.1 5.0 11.7 5.5 10.4 6.5 2.9 6.1 5.4 Romania 1.2 1.1 2.2 6.4 6.5 11.4 9.9 13.9 4.8 2.9 2.7 Slovakia 1.6 4.1 2.2 3.0 2.4 4.7 3.6 4.7 -0.0 0.5 2.1 Bulgaria 0.8 0.9 2.1 3.4 3.9 7.8 12.4 9.9 3.4 1.6 1.9 Estonia 0.5 0.3 0.9 1.0 2.9 1.8 2.7 1.7 1.8 1.5 0.3 Slovenia 0.4 1.6 0.3 0.8 0.6 0.6 1.5 1.9 -0.7 0.4 1.0 Lithuania 0.4 0.7 0.2 0.8 1.0 1.8 2.0 2.0 0.1 0.8 1.2 Latvia 0.1 0.3 0.3 0.6 0.7 1.7 2.3 1.3 0.1 0.4 1.6

Source : UNCTAD, FDI/TNC database, available at: http://unctadstat.unctad.org.

Note : Data exclude FDI in special purpose entities. Comparator countries are listed by the order of their inward FDI stock in 2011. 12

Annex table 2a. Hungary: ratio of inward FDI flows to gross domestic capital formation

(Per cent)

Economy 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Hungary 32.1 19.4 11.4 18.5 30.4 27.7 13.4 19.0 7.6 9.1 20.0 Memorandum: other new EU member countries from Central and Eastern Europe Poland 14.5 11.1 11.6 28.1 18.6 29.2 25.7 12.6 14.1 9.7 14.5 Czech Republic 32.4 40.7 8.6 17.5 37.5 15.4 23.7 12.4 6.8 15.1 10.5 Romania 13.9 11.6 17.2 39.0 27.6 36.2 19.3 21.3 11.7 8.3 5.7 Slovakia 26.2 61.5 26.2 29.9 19.1 31.7 18.2 20.0 - 0.0 3.0 10.0 Bulgaria 31.9 31.6 53.2 66.0 52.7 85.1 102.6 56.6 28.5 16.9 16.7 Estonia 32.7 13.3 29.9 25.8 64.3 29.7 36.5 25.6 44.3 41.9 5.4 Slovenia 7.3 30.4 4.4 9.8 6.5 6.2 11.5 12.4 - 5.5 3.4 10.3 Lithuania 18.2 25.2 4.6 15.4 17.4 23.9 18.2 16.3 1.0 12.9 16.2 Latvia 6.4 11.4 11.2 16.8 14.4 25.6 24.0 12.8 1.7 8.8 24.7

Source : UNCTAD, FDI/TNC database, available at: http://unctadstat.unctad.org.

Notes : Data exclude FDI in special purpose entities. Comparator countries are listed by the order of their inward FDI stock in 2011.

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Annex table 3. Hungary: sectoral distribution of inward FDI stock, 2000, 2009

(US$ million) Sector / industry 2000 2009 All sectors / industries 22,892 98,176 Primary 255 963 Agriculture, forestry, and fishing 185 534 Mining, quarrying and petroleum 70 429 Secondary 11,019 29,856 Food, beverages and tobacco 1,615 2,575 Textile and leather 727 3,884 Wood, pulp, paper and publishing 483 1,429 Coke, refined petroleum and nuclear fuel 2 1,991 Chemicals 1,097 2,592 Rubber and plastic 405 1,205 Other non-metallic minerals 522 2,003 Metals 442 1,665 Machinery and equipment n.e.c. 423 1,366 Electrical and optical equipment 2,068 4,212 Transport equipment 1,815 4,889 Furniture and manufacturing n.e.c. 62 188 Construction 299 882 Services 11,417 65,178 Electricity, gas and water 1,465 4,472 Wholesale, retail trade and repair 2,134 13,491 Hotels and restaurants 299 580 Transport and telecom 3,800 8,546 Financial intermediation 2,330 10,066 Real estate 978 8,990 Computer services 136 681 Business services 1,428 221,924 Other services 253 631 Acquisition of real estate 281 2,179 Unspecified other industries 21 0

Source : based on data from the National Bank of Hungary.http://english.mnb.hu/Statisztika/data-and- information/mnben_statisztikai_idosorok/mnben_elv_external_trade/mnben_kozetlen_tokebef .

Note : data converted using the IMF exchange rate of 31, December 2000: USD 1= HUF 221.73, and of 31 December 2009: USD 1= HUF 188.07.

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Annex table 4. Hungary: geographical distribution of inward FDI stock, 2000–2009

(US$ million) Region / economy 2000 2009 World 22,892 98,176 Developed economies 20 ,294 78728 Europe 18 ,320 72 ,880 European Union a 17 ,641 69 ,339 Austria 2,042 13,486 Belgium 485 2,991 Cyprus 166 2,749 Denmark 81 628 Finland 239 1,224 France 1,270 5,075 Germany 8,604 21,634 Ireland 182 847 Luxembourg 253 5,560 Netherlands 3,358 17,970 Sweden 223 684 Spain 37 1,402 United Kingdom 189 1,598 Other Europe 442 3,541 Liechtenstein 83 365 Switzerland 359 3,176 North America 1,822 4,662 Canada 76 498 United States 1,746 4,164 Other developed economies 244 2,475 Japan 152 1,186 Developing economies 267 13,643 Africa 5 180 Asia and Oceania 154 1689 Latin America and Caribbean 108 10,276 Transition economies -1b 1,498 c Russian Federation -48 1,674 International organizations 99 19 Unspecified origin 2,449 4,805

Source: based on data from theNational Bank of Hungary http://english.mnb.hu/Statisztika/data-and- information/mnben_statisztikai_idosorok/mnben_elv_external_trade/mnben_kozetlen_tokebef .

a Values of FDI stock were negative for Greece (2000 and 2009), Ireland (2000), and Italy (2000 and 2009). b Values of FDI stock were negative in the case of Albania, Bulgaria, the Czech Republic, the former Yugoslav Republic of Macedonia, and Ukraine. c Values of FDI stock were negative in the case of Albania, The Former Yugoslav Republic of Macedonia and Ukraine.

Note : data converted using the IMF exchange rate of 31, December 2000: USD 1= HUF 221.73, and of 31 December 2009: USD 1= HUF 188.07.

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Annex table 5. Hungary: Top 10 Hungarian firms with foreign ownership, including foreign affiliates, ranked by sales, 2010

Sales

Foreign investor with the highest share of (million Rank Company Industry Share of ownership US$) foreign ownership 1 MOL 64.5% Dispersed; CEZ (Czech Rep.) (7.3%) Energy 20,602 2 Audi Hungária 100% Audi (Germany) Automotive 6,357 3 Nokia 100% Nokia Corp.(Finland) Electronics 4,876 4 GE Hungary 100% GE (United States) Electronics 4,865 5 Samsung 100% Samsung Electronics (Republic of Korea) Electronics 4,734 Electronics 6 Philips 100% Philips Electronics (Netherlands) Electronics 3,703 Industries 7 E.OnHungaria 100% E.ON Ruhrgas International (Germany) Energy 3,258 8 Panrusgáz 90% E.ON Ruhrgas International (Germany) Energy 2,999 (50%), Gazprom Export, (Russian Federation (40%)) 9 Fibria Trading 48.3% FibriaCelulose SA (Brazil) Wholesale trade (paper 2,979 International products) 10 Magyar 78.37% Deutsche Telekom (Germany) (59.21%) Telecommunications 2,922 Telekom

Source : HVG (Hungarian economic weekly), October 8, 2011; WebPages and balance sheets of the companies. Note : The exchange rate used is the IMF rate of 31, December 2010: USD 1=208.65 HUF. MOL is majority foreign-owned but not foreign-controlled (see the text for explanation).

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Annex table 5a. Hungary: largest non-financial firms with foreign ownership in the economy, including foreign affiliates, ranked by own capital, 2010

Own capital of the Rank Name Foreign parent company Industry Hungarian affiliate (US$ million) 1 MOL n.a. Energy 9,463 2 Audi Hungaria Motor Ltd. Audi (Germany) Car production 6,965

3 M-Telekom Deutsche Telekom (Germany) Telecommunications 2,547 4 Magyar VillamosM űvek n.a. Energy 2,502 5 HumantradeTeva Hungary Teva (Israel) Pharmaceuticals 2,171

6 GE Hungary GE (USA) Electronics 2,111 7 Richter Gedeon n.a. Pharmaceuticals 2,096 8 E.OnHungaria E.ON Ruhrgas International Energy 1,681 (Germany) 9 Tesco Global Tesco (United Kingdom) Retail 1,281 10 MAVIR n.a. Energy 1,278

Source: Figyel ő TOP 200 (an annual special issue of the Hungarian economic weekly Figyelo ). Note : The exchange rate used is the IMF rate of 31, December 2010: USD 1=208.65 HUF. MOL and Richter Gedeon are majority foreign-owned but not foreign-controlled (see text for explanation)

Annex table 5b. Hungary: Top 10 Hungarian firms, ranked by exports, 2010

Share of Foreign investor with Industry Exports Export/sales Rank Company foreign the highest share of (million (%) ownership ownership US$) 1 MOL 64.5% Dispersed, CEZ (Czech Energy 14,677 71.2 Rep.) (7.3%) 2 Audi Hungária 100% Audi (Germany) Automotive 6,333 99.6 3 GE Hungary 100% GE (United States) Electronics 4,772 98.1 4 Nokia 100% Nokia Corp.(Finland) Electronics 4,726 96.9

5 Samsung Electronics 100% Samsung Electronics Electronics 4,392 92.8 (Republic of Korea) 6 Philips Industries 100% Philips Electronics Electronics 3,485 94.1 (Netherlands) 7 Fibria Trading International 48.3% FibriaCelulose SA Wholesale 2,979 100.0 (Brazil) trade (paper products) 8 Flextronics International 99.96% Flextronics (Singapore) Electronics 2,622 98.2

9 Magyar Suzuki 99.98% Suzuki Motor Automotive 1,870 91.2 Corporation (Japan) 10 ChinoinGyógyszer- Indirectly Sanofi-Aventis (France) Pharmaceutical 1,289 83.4 ésVegyészetiTermékekGyáraZrt. 100% (100%) products

Source : HVG (Hungarian economic weekly), October 8, 2011; webpages and balance sheets of the companies. Note : The exchange rate used is the IMF rate of 31, December 2010: USD 1=208.65 HUF.

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Annex table 6. Hungary: main M&A deals, by inward investing firm, 2009–November 2011 Estimated/ Shares announced Home Target Year Acquiring company Target company acquired transaction economy industry (%) value (US million) 2011 YantaiWanhua China BorsodChemZrt. Chemicals 58.0 1,700.5 Synthesize Group 2011 Advent International United States Provimi Pet Food Animal food 100.0 264.8 Corp. Zrt. 2011 Cinema City Netherlands Palace Cinemas Movie 100.0 37.7 International NV Hungary Kft. theatres 2011 Medort SA Poland Rehab-Trade Kft. Medical 100.0 7.2 instruments 2011 Magyar Telekom Germany DatenKontorKft. Computer 100.0 6.3 (Deutsche Telekom services Group) 2010 YantaiWanhua China BorsodChemZrt. Chemicals 38.0 190.4 Synthesize Group 2010 Allianz Germany Allee Center Kft. Life 50.0 145.0 insurance 2010 EBRD United IberdrolaRenovable Electricity 25.0 72.5 Kingdom sMagyarországKft.

2010 Mid Europa Partners United InvitelTávközlésiZr Telecom 35.4 24.7 Kingdom t. 2010 FHB Kereskedelmi Hungary Allianz Insurance 100.0 14.7 Bank Kft. (VCP HungáriaBiztosító Finanz Group) Kft. 2010 SBI European Fund Japan CIG Insurance 10.0 12.6 PannóniaÉletbiztosí tóZrt. 2010 Asseco Slovakia Slovakia StatlogicsZrt. Software 70.0 11.6 2009 Surgutneftegaz Russian MOL Nyrt. Oil and gas 21.2 1,851.6 Federation 2009 Mid Europa Partners United InvitelTávközlésiZr Telecom 64.6 10.8 Kingdom t. 2009 Magyar Telekom Germany KFKI-DirektKft. Computer 100.0 1.8 (Deutsche Telekom services Group)

Source: Authors' calculations, based on UNCTAD, cross-border M&A database.

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Annex table 7. Hungary: main Greenfield projects, by inward investing firm, 2009– November 2011

Estimated/ Estimated announced Key business number of Year Investing company Home economy Industry investment function jobs value created (US$ million)

2011 General Motors United States Automotive Manufacturing 800 670 2011 VerbioVereinigteBioEn Germany Alternative/ renewable Manufacturing 282 137 ergie energy 2011 KBC Group NV Belgium Financial services ICT and Internet 218 125 infrastructure 2010 Volkswagen Germany Automotive Manufacturing 1,800 1 205 2010 Advanced Power AG Switzerland Coal, oil and natural gas Electricity 102 717 2010 General Motors United States Engines and turbines Manufacturing 1,000 673 2010 Alpiq (ATEL) Switzerland Coal, oil and natural gas Electricity 71 503 2010 BNP Paribas France Real estate Construction 3,000 485 2010 CEZ Group Czech Republic Coal, oil and natural gas Electricity 533 240 2010 Atenor Group Belgium Real estate Construction 2,576 240 2010 Givaudan Switzerland Food and tobacco Manufacturing 1,582 167 2010 Ethanol Europe Ireland Alternative/renewable Manufacturing 77 142 energy 2010 In Time Germany Transportation Logistics, 74 130 distribution and transportation 2010 RaluLogistika Croatia Transportation Logistics, 74 130 distribution and transportation 2010 Hankook Tire Republic of Rubber Manufacturing 450 108 Korea 2009 Vorskla Steel Ukraine Metals Manufacturing 3,000 927 2009 GDF SUEZ France Coal, oil and natural gas Electricity 44 308 2009 Ascent Resources United Kingdom Coal, oil and natural gas Extraction 215 294 2009 Gazprom Russian Coal, oil and natural gas Extraction 215 294 Federation 2009 ING Groep Netherlands Real estate Construction 3,000 293 2009 AES Corp. United States Coal, oil and natural gas Electricity 533 197

2009 Gebrüder Weiss Austria Transportation Logistics, 74 130 distribution and transportation 2009 LEGO Denmark Consumer products Manufacturing 1,300 119

2009 King Long United Auto China Automotive Manufacturing 663 117 Moto Industry

Source: The authors, based on information from the Financial Times Ltd, fDi Markets (www.fDimarkets.com).

Note: Data collection closed at 23 November 2011.